Greetings, and welcome to the Kodiak Gas Services Second Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Graham Sones, Vice President, Investor Relations. Please go ahead.

Good morning, and thank you for joining us for the Kodiak Gas Services conference call and webcast to review second quarter 2025 results. Participating from the company today are Mickey McKee, President and Chief Executive Officer; and John Griggs, Executive Vice President and Chief Financial Officer. Following my remarks, Mickey and John will discuss our financial and operating results, review our updated 2025 guidance, and then we'll open up the call for Q&A. There will be a replay of today's call available via webcast and also by phone until August 21, 2025. Information on how to access the replay can be found on the Investors tab of our website at kodiakgas.com. Please note that information reported on this call speaks only as of today, August 7, 2025, and therefore, you're advised that such information may no longer be accurate as of the time of any replay listening or transcript reading. The comments made by management during this call may contain forward-looking statements within the meaning of the United States federal securities laws. These forward-looking statements reflect the current views, beliefs and assumptions of Kodiak's management based on information currently available. Although we believe the expectations referenced in these forward-looking statements are reasonable, various risks, uncertainties and contingencies could cause the company's actual results, performance or achievements to differ materially from those expressed in the statements made by management, and management can give no assurance that such statements or expectations will prove to be correct. The comments today will also include certain non-GAAP financial measures. Details and reconciliations to the most comparable GAAP measures are included in yesterday's earnings release, which can be found on our website. And now I'd like to turn the call over to Kodiak's President and CEO, Mr. Mickey McKee. Mickey?

Thanks, Graham, and thank you all for joining us today. We began all meetings at Kodiak with a safety topic. The tragic events this summer in the Texas Hill Country struck close to home and deeply impacted many of our employees, friends and colleagues in the industry. Our thoughts and prayers continue to be with those impacted as they recover and they heal from this tragedy. While the extent of the devastation was difficult to grasp, it was heartening to see our nation and our state rally behind the affected communities. And I want to personally thank the Kodiak employees who volunteered their time and resources to assist with the recovery efforts. Before we get to our strong financial results, I want to start by discussing 2 recent developments that we think are very positive for our shareholders. First is the $100 million increase to our share repurchase program that we announced yesterday. Since our initial stock repurchase in September of 2024, we bought back about 2 million shares at an average price of just over $30. Given the current stock price and the remaining availability on our previous repurchase authorization, the Board thought it would be prudent to increase and extend the program. The meaningful step-up in our share repurchase program reflects our confidence in the company's strategy, the demand outlook for contract compression and natural gas and underscores Kodiak's commitment to returning capital to shareholders. Second, we were very pleased to learn last week that Kodiak was added to the S&P Small Cap 600 Index as of yesterday. This is a significant milestone as it highlights the strength of the company's business strategy and our commitment to highly profitable growth. The inclusion in the index will increase Kodiak's visibility in the investment community and enhance shareholder value over…

Thanks, Mickey. While the energy landscape is constantly changing, we remain focused on what we can control, and we delivered another quarter of solid financial performance and great execution all around. As evidence of that, adjusted EBITDA for the second quarter was $178.2 million, a 15% increase versus last year's second quarter results. From a segment perspective, for the second quarter, we achieved strong year-over-year revenue growth of over 6% in Contract Services. In Contract Services, revenue per ending horsepower was $22.77 this quarter, a nice uplift sequentially and versus the same quarter last year. Relative to Q2 of '24, we increased our Contract Services adjusted gross margin percentage by 430 basis points to 68.3%. This significant increase in margin reflects the success we've realized in achieving higher average pricing alongside the progress we made in both high-grading our fleet and deploying new technology. In our Other Services segment, we generated higher-than-expected gross margins on revenues of approximately $29 million. SG&A, net of noncash items for the quarter was $28.8 million, up from Q1 and in line with a more normalized level going forward. We reported net income attributable to common shareholders of $39.5 million or $0.43 per fully diluted share for Q2, a significant increase from the $6.2 million and $0.06 per share we earned in Q2 of '24. Growth CapEx for the quarter was just under $38 million, consisting primarily of new unit CapEx for the 32,000 new unit horsepower. While growth CapEx was down from Q1, we attribute this to timing as some deliveries moved to Q3. We're still on track to add roughly 150,000 in new unit horsepower over the course of 2025. And that's before the 30,000 horsepower of working units we've acquired in Q3 that Mickey highlighted earlier and that fit within our existing…

Thanks, John. Our stable recurring cash flow business model is performing well in the current environment. Demand for contract compression remains strong as reflected in our pricing power and revenue growth. We're adding new large horsepower units and capitalizing on opportunities to add existing working horsepower to our fleet as well as divest noncore underutilized small horsepower units. These strategic decisions have helped us set new financial records in several key metrics, allowing us to once again increase margins and deliver growth in earnings per share, positioning us to continue to reward our shareholders for their investment in Kodiak. Thanks for your participation today, and now we're happy to open up the line for questions. Operator?

[Operator Instructions] Our first question is from Jim Rollyson with Raymond James.

Nice quarter, and thanks for all the outlook commentary, Mickey. I'd like to dig in on that a little bit. Your comments around the gas market, the Permian, et cetera, certainly jive with what we've heard and our work on kind of from beginning of the year to now on electricity growth driven by all this data center investment that continues to actually ramp higher and the LNG permitted capacity, new permits have been added to where that outlook over the next 5 years seems like it's gone up. And obviously, the oil macro has been weak and the stock has not acted great from where we were in the early part of the year. I'm curious what your view is of the disconnect between what's going on in the ground versus what investor sentiment seems to be.

Jim, I appreciate you joining us this morning and asking the question. I mean, it's an interesting topic, right? Like I think that -- the interesting part about it is there seems to be just that disconnect between what investor sentiment looks -- thinks is going on really in the Permian Basin and what the reality is. And I think a lot of it is the difference between the producers and what they have to do with their gas versus oil growth, right? And so I think there's a lot of people that attribute oil growth to compression demand, and there's really a difference there between the gas growth and the oil growth in the Permian Basin. So I think that's kind of where it stems from. And so even in a choppy oil price commodity market, we're kind of bifurcated from that because the demand for large horsepower compression is continuing to grow because of the gas growth out of the Permian Basin.

Appreciate that. And maybe switching gears on margins a little bit. You had best margins you've had in a long time, maybe ever, raised your margin guidance a bit. As we think about this going forward, your pricing kind of continues to trend up. You highlighted a few things on the technology side and new ERP system, all that probably helps the cost side or at least keep it relatively stable. Is there any reason to think margins don't continue to kind of creep up at least into the upper end of your guidance over the next several quarters?

We would hope so. I think that's what we -- where we'd like to see it go. We think that there's definitely this ERP system that we've implemented that we've been operating on this week is definitely going to make us a leaner, more efficient company. Now there's going to be some learning curve associated with that. But we chose that system because we think it's going to make us a more efficient and better company. So -- and also have the ability to layer on some of the AI and machine learning type stuff that we can develop, and additionally kind of layer on more technological advances as we move forward. So we would think that it will continue to tick up. But obviously, like I said, there's going to be a little bit of a learning curve with this ERP implementation in the short term.

Our next question is from John Mackay with Goldman Sachs.

You talked through a couple of kind of interesting things on the commercial side. But maybe we're just looking at the units you're acquiring from operators and/or partnering with. I mean, how should we think about those deals in relation to your 3% to 4% annual growth in horsepower you've been talking about? Is that part of it? Is it incremental? What could kind of the cadence look like from here?

I think it's part of what we're talking about. We don't have any big deals in the hopper that would be earth shattering. But these couple of little opportunistic type of developments that we have where we can pluck off some stuff that tuck in really nicely is something that that we're really honed in on, and looking for more opportunities like that. So I don't think there are going to be any big needle mover type of acquisitions, but nice type stuff that will help us accrete margins and that kind of thing is going to be something that we're always in the market to look for.

I appreciate that. And then you guys touched on this a little bit. But just in terms of buyback cadence, how should we think about your kind of ability to lean into the new authorization? Is that dictated by incremental free cash flow? Is that the balance sheet? Is it your view of the share price? Maybe just walk us through that.

Yes, John, I think a lot of it will be dictated by share price. We've stated very publicly that our goal for our leverage target is 3.5x. When we see softness in the share price like we've seen recently, it gives us reason to kind of lean into that buyback and look at that pretty significantly. So we want to stay kind of within a stone's throw of that leverage target of where we're going to -- where we want to be, but also take advantage opportunistically of weakness in the share price.

Our next question is from Doug Irwin with Citi.

I appreciate the context you provided around the contracting efforts into '26. Just wondering if you're able to give any more detail around just where you see CapEx or fleet additions maybe trending into next year, at least maybe directionally relative to the last few years? Or maybe a different way to ask, just if you could help frame your level of confidence in next year's backlog relative to maybe where you were at this point last year?

Doug, I don't think we're ready to really throw a number out there based on kind of where we're at just because we still have some finalization to do around budgeting for next year and that kind of thing. And quite frankly, we're working on some pretty big deals that could move the needle for us. So it's not something that we're ready to guide on or kind of indicate right now. But I will tell you that we feel really good about where we're at right now as far as where we're at in the year and what we've contracted so far. And it's pretty consistent with where we've been in past years. And we think that we shouldn't have a problem filling that out for the remainder of the year and the third and fourth quarter that we're looking at.

Got it. And then maybe just a follow-up on asset sales. You executed another one this quarter. Just curious how much more wood you have to chop there? Is the fleet generally where you want it to be? Or is there maybe still some smaller horsepower that could be viewed as noncore? And then how are you thinking about proceeds in general? Could that be another lever to potentially be able to recycle some cash into buybacks?

Yes, Doug, this is John. So good question. We get asked about this a lot. So I think the overarching answer is we're constantly looking to high-grade the fleet and high-grade the fleet in our minds means large horsepower, density, quality customers, quality environmental aspects of our units. So we will always seek and kind of look at every single asset is it providing appropriate returns and margins, and it's going to be core to the fleet and to our customers over the medium and long term. So that's the overarching kind of framework that we use. That said, we sold a whole bunch of stuff since we bought CSI. I think in total, it's something like 160,000 horsepower that we've sold, and we would deem 99% of that kind of noncore stuff. So we do have more that we'll continue to sell, whether it's the asset or it's the geography. But we like to say it's just going to be pruning around the edges in small pieces. The cash proceeds that we received from those are small. But of course, we will redeploy that into the large horsepower or some of the other capital allocation framework things that kind of seem to be best for the shareholder.

Our next question is from Theresa Chen with Barclays.

On the topic of your customers experiencing elevated compression costs, and there is this natural tension between wanting to save money and investing in growth. What you touched upon earlier, Mickey, in these joint partnerships with your customers to free up their CapEx capabilities. Is this how you see the market evolving? Is this a preferred means of capital deployment for you? And are there other creative solutions like this to come?

Yes, I think there's other creative solutions like this that we're going to be working on all the time and working with our customers. I've stated it very, very publicly before that I think this industry as a whole has underestimated the amount of compression that it takes to produce oil and gas out of the Permian Basin due to the liquids-rich nature of the gas and how much volume is ultimately coming out of the Permian. So I think that the majority of our customers realize that, hey, we need a strategic partner in compression and that we're very important to what they do overall in their production and their operations. So yes, that kind of allocation priority for them of buying versus owning versus outsourcing compression is a strategic decision for them. In times like these and choppy commodity price environments, there's a lot of people that are working to preserve capital right now. And I think that there is going to be more opportunities like this going forward, and we'll look to capitalize on those and opportunistically jump on those as they happen.

And on the topic of the significant investments you've made into your technology platform, can you talk about how much savings or ultimate margin uplift you're targeting or can even be quantified from these investments?

Good question. I know what we would like -- where we'd like to see our margins go. We have a pretty different operating model than a lot of other people in this industry. So with our margins, we think where we're at right now is really a high watermark, that 68.3% in compression operations is really a -- is a high watermark for us. We think we can continuously drive that up through additional efficiencies and that kind of thing gained from not only our ERP system, but also our artificial intelligence and machine learning and that kind of thing. And we're really just beginning to scratch the surface of what that can do for us right now. So can I quantify how high it will go or what we -- what our expectations are? Now it's probably a little bit early to tell that, but we think that there's definitely upside here.

Our next question is from Sebastian Erskine with Rothschild & Company.

Most of my questions have been answered. I just kind of want to follow up on the last question in terms of the dynamic with your customers. I guess one of the challenges that we saw in 2024 was producers who otherwise would have wanted to outsource compression kind of were forced to go directly to OEMs due to the tightness in the market. Can you talk about a bit more the evolution in lead times with Caterpillar and Ariel? And also just the potential appetite from E&Ps to enter into kind of sale and leaseback arrangements against the backdrop of kind of lower operating cash flows. Could that drive more outsourcing next year as a percentage of the mix?

So a couple of points to hit on there -- with that question. Number one, lead times, we haven't seen lead times from CAT or Ariel drastically come in and change significantly from where they're at and where they've been for the last couple of years. You're kind of 40 to 45 weeks out on the engine type lead times. And depending on shop availability and shop space, there's an additional amount of time to get it built and get it out the door. So I haven't seen those appreciably change significantly over the last 3 to 6 months. As far as the E&Ps and the people that own their own compression, I think that, that's a -- that's pretty customer-by-customer specific on what their capital allocation priorities are. And there's going to be some that are very apt to want to outsource more and more all the time, like I said earlier, from a capital preservation mode right now from a -- with cash flows being a little bit lower with a lower commodity price potentially. So I think that we'll just look to have those discussions with customers on an opportunistic basis and people that are interested in working on something like that, we'll certainly be interested in having those discussions with them.

Appreciate that, Mickey. And then just a broader point on the consolidation in the sector. I mean I'd appreciate your view on some of the kind of biggest kind of learnings and challenges from the CSI Compressco acquisition now that we've had some time for that to kind of bed in. And then I guess in terms of the nature of the fleet in the remaining kind of 25% or so of that outsourced market that's not controlled by you and the big 3. Can you give a sense of what that looks like in terms of the quality and the nature of that horsepower?

Yes, absolutely. So as far as the nature of the fleet that's not controlled by, call it, the big 3 in this industry, there's a couple of private operators out there that have some attractive assets that we'd be interested in. But honestly, the list is getting shorter and shorter all the time. And the majority of what else is out there is probably dominated by smaller type horsepower that's not really core to what we're looking for. So that all being said, I think that there still could be some interesting M&A opportunity out there, but it is getting thinner all the time after considering the consolidation in the industry.

I'll touch on CSI. [ Seb, ] this is John. I'll touch on the CSI acquisition. I think we would sum it up is a wonderful acquisition strategically, financially, culturally, like we're really blessed that we were able to put that deal together. We started out. I think we guided a day of announcement, maybe $20 million of synergies. We stopped counting at probably $45 million, and that's really good. We're in the last step of the integration, which is this ERP system. And so far, so good. Hats off to our IT team and all the folks that have been involved. It's going really, really well. So look, if we could find more like that all day long, but our focus is on increasing shareholder value and being highly strategic in how we act. And so it's going to have a pretty high bar on what we want to go do.

Our next question is from Brian DiRubbio with Baird.

Just a couple of questions for me. Just out of curiosity, Mickey or John, one of your competitors was complaining about labor availability. That's something I haven't heard anybody in this industry say for about 2 years now. Is that an issue that you guys are seeing at all?

Brian, thanks for joining us this morning. Labor continues to be tight in the Permian Basin. There's no doubt about that, and we don't think we've seen that alleviate for 2 or 3 years now since kind of the post-COVID era. So that's a challenge that everybody deals with in the Permian Basin and something that we spend a lot of time and effort working on, which is why we've kind of deployed and developed this our Bears Academy and our elite training program that we have for operators and to get younger, less experienced technicians up to speed and trained up to do their jobs effectively and safely as soon as possible as we hire younger people that have less experience in the industry. So something that we're very focused on and something that we are working to develop additional technologies to help advance the careers of our less experienced people at all the time.

Got it. No, I appreciate that. And then just as we think about the acquisitions of the assets that you acquired from some operators during the quarter, any way you can help us understand sort of the economics of that versus maybe some of the recent M&A transactions in the industry? Do you think you're getting a better return on these investments, equal? Just trying to understand the economics there.

It's a great question. So it's -- this is John again. So no 2 acquisitions are the same. And you're going to usually buy stuff and it creates extra density within your operation or if it's the right horsepower or both. And you're trying to get all of those things to line up or with the customer, [ or that ] you really want to work for. And I'd say in this case, these are opportunistic opportunities where we had great people, we didn't have enough density in certain areas, and we had the counterparty that was willing to sell them because they had the opposite. It was like something they were ready to move forward on. So the economics are, call it, somewhere between $200 and $400 a horsepower typically because you're going to be buying something used or you pay something more. And the return on investment, you don't just base it specifically on that. You're kind of thinking strategically around the area that you're going to drop those into. They can be really compelling.

Got it. And final question for me. When you bought CSI, obviously, you bought mostly for the compression units, but they had some other businesses in and around the wells. I think it was a gas [ cryro ] business. Is that an area that's of any focus? I know you said you were going to retain those assets at the time of the acquisition, but is that an area of interest or focus for you to expand? Is it still profitable? Just love to understand. I know it's very tiny, but love to understand any dynamics around that.

Yes. Brian, yes, that's true. It is a very, very -- very small part of our business right now. But it's one of those things that we haven't put a ton of capital in, and we've just kind of continue to operate it as a cash flow business that is profitable coming out of that -- out of the acquisition. So our -- like I said, the capital allocation priorities has been, number one, on growing the large horsepower fleet, but we still have some of those hanging plants and gas coolers and that kind of thing that was a small part of the CSI business that we've continued to cash flow over the time.

Is that something that could be -- you could -- you're thinking about maybe ultimately exiting or just going to keep it running for cash at this point?

I think the plan right now is just keep it running for cash right now and continue to keep it utilized and continue to harvest that cash out of that business.

Our next question is from Jeremy Tonet with JPMorgan.

This is Eli. Maybe just wanted to touch a little bit on the electric side versus gas. I know in previous quarters, there was a lot of focus on electric motor drive compression. And I just wanted to get a sense of where that stands today and what your customers are kind of asking for as they start to fill up orders into 2026 and beyond what that market looks like?

Yes. Thanks, Eli. I appreciate you joining us this morning. We're still seeing pretty significant demand on the electric motor-driven side of the business. Our -- the large players in the industry that are in our top 10 customer list are still pretty significantly looking at electric motor-driven compression. They still have goals to electrify additional compression over the course of the next several years. There's no doubt that access to power is a challenge for everybody surrounding the Permian Basin. And it really is, again, is kind of a customer-by-customer thing that as people are closer to metropolitan areas and closer to power sources, they're much more apt to want to electrify or go with electric compression than people that are in more remote areas. So it really has a lot to do with where the acreage is that they're producing from and kind of their corporate goals. So some people are very interested in electric. Some people are not very interested at all. So that all being said, we're still seeing demand for electric compression. We're still going to lean into it and still be very good at it and be a quality supplier to our customers.

Awesome. And then I think margins and pricing have been touched on this -- quite a bit this call, but just maybe to put another point on it. We continue to see dollars per horsepower per month move up into the right. Should we expect this trend to continue? And how kind of consistently does that continue to move up? Is it just a function of new unit recontracting and other sort of items like that? But just trying to get a sense of how much more we could expect to see that metric move up into the right?

I mean, Eli, our goal is to continue to move that up every quarter from here on out. That's what the -- that's the -- what we've tasked our commercial team with. And as we're adding contracts for new equipment that is at higher rates than the fleet average, you should see positive pressure there on that number. You have to keep in mind that as -- how much horsepower is deployed in any quarter, when you have a heavy amount of horsepower deployed, which is what we're expecting for Q3, and you have partial quarters kind of full revenues, it could look a little bit different. But when you have full quarter's revenues for kind of big slugs of horsepower, you should see that number continue to push up. So we would expect that number to continue to go up. That's the plan at least. And so quantifying how far and when it will get to what point is a little bit harder, and we'll look to guide on that a little bit more when we come out with 2026 guidance.

Eli, and I just want to put a finer point on what Mickey just said there, too, about when we learned a valuable lesson in our Q1 earnings call or the call where our dollar per horsepower fell and people immediately latched on to that and assumed that the bloom was off the roads in the compression market and pricing falling. When it was absolutely not the case, that was a function of asset sales, nothing had changed. It was a function of asset sales, was a function of kind of when the horsepower came in. So where Mickey just said, we will have a large, I guess, amount of horsepower coming in, in Q3. That's going to be something we're going to be ahead of this time to make sure that the market doesn't misinterpret, adding a lot of horsepower later in the quarter with any softness in the marketplace. If there's softness, we'll tell you, but don't get confused by that number.

Thank you. There are no further questions at this time. I would like to hand the floor back over to Mickey McKee for closing comments.

Thank you, operator, and thanks to everyone participating in today's call. We look forward to speaking with you again after we report our results for the third quarter. Thanks.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.